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Slow Recovery May Be Leading to Serious Housing Shortages

Even as foreclosures continue to flood some of the worst-hit housing markets in the country, economists are beginning to sound the warning that today’s extremely low levels of new residential production could lead to significant housing shortages, especially among market-rate rental apartments, as household formation rates return to normal.

Before talking about purchasing a house, it’s important to note two things. First - and this is extremely important - the housing market is actually localized. So the outlook in Kitsap County is different than another city across the state or on the other side of the country. Second, home prices are tied to employment. For example, if someone feels like their job is in jeopardy, it might be enough to stop them from making a move. So, if the Detroit, Michigan job market is feeling a pinch (which it is), the home prices in Detroit, Michigan may be down as well (which they are). But we live in a military falsehood with people coming and going all the time and billions of dollars coming into the PSNS Shipyard and Bangor Sub Base every month.

The housing downturn and economic recession have kept household formation rates at below-normal levels for roughly three year. As the economy moves to higher ground, the housing market will begin to feel the pressure from new households and there will be a surge of demand from echo boomers, who comprise an even larger group than their baby-boomer parents.

NAHB economists project that the industry will need to deliver 16 million homes over the next 10 years to keep pace with demand. As the excess inventory is worked off, which is likely by the end of 2012, the long-run demand for new housing — based on population growth, immigration and the replacement of losses from the housing stock — will average approximately 1.5 million single-family and 300,000 multifamily units annually, or about 1.8 to 1.9 million total starts.

Coming off extremely low levels of construction, starts last month were running at a seasonally adjusted annual rate of 591,000, a level that is far below what will be needed.

When housing starts bottomed out in the first quarter of 2009, they were running at only 27% of average starts during the “normal” production period of 2000 to 2003, according to analysis by NAHB. This year, production is expected to rise to 45% of normal, with a further increase to 67% of normal next year.

NAHB is forecasting 647,000 total housing starts in 2010 and 991,000 in 2011, an indication of expectations for housing to recover at a relatively slow pace. Curtailed credit to build new housing is a major constraint, and the availability of acquisition, development and construction (AD&C) financing is expected to remain exceptionally tight even during the early phases of the housing upturn.

Jerry Lampert